It’s summer and we often get asked about rules around the hiring of children in a business. As business owners, we are often looking for ways to maximize opportunities and optimize financial benefits. One avenue that business owners can explore is hiring their own children who are under the age of 18. By providing them with meaningful roles and responsibilities, not only can you instill essential skills and work ethics, but you are also creating a strong foundation for their future success. In this blog post, we are going to dive into the tax advantages of employing your kids and why it can be a rewarding decision for both the family and the business.
1. Your child can develop a work ethic and essential skills.
Working in a business environment can help children develop essential skills that will benefit them in any profession they choose. From interpersonal communication and teamwork to time management and organization, these skills are transferable to any industry or career. By giving children meaningful tasks and responsibilities, kids understand the importance of commitment, punctuality, and hard work. By forming a sense of ownership in their role, kids will foster dedication and will be motivated to perform to the best of their abilities. These are great foundational qualities for life!
2. You can spend more time together.
Time flies, so every minute counts with our children. Working together as a family can create a unique sense of unity and camaraderie. Hiring children offers an opportunity to strengthen family bonds and spend quality time together while pursuing shared goals. Plus, they get to see you in action, with other people, as the boss.
3. Your child can have tax free earnings (up to $13,850 in 2023).
If your child is not doing any other work or earning other income, the amount up to the standard deduction is earned tax free. It’s quite possible they won’t have to file a tax return either.
4. You may not have to pay taxes.
As long as your child is under 18 and you are a sole proprietor or LLC, you won’t have to pay any social security or Medicare taxes. If you are an S-Corp or C-corporation, you will have to withhold these taxes (but your child will likely receive them back as a refund). All state’s rules vary, so please consult your tax accountant.
5. You can use these expenses as a deduction.
When your children work for your business, their wages are considered a legitimate business expense, as long as they are a reasonable age and performing reasonable work that some else could be paid to do. Other employee-related expenses such as health insurance premiums or retirement contributions may also be deductible.
6. Your child can open a Roth IRA.
By employing your children, you create an opportunity for them to contribute to a Roth IRA. The income they earn from the business can be used to fund their Roth IRA account, up to the allowable contribution limit. Roth IRA’s offer tax-free growth and tax-free withdrawals in retirement, providing a valuable long-term savings and investment tool for your children. Starting early can give them a significant head start in building their retirement nest egg.
7. You create financial literacy and responsibility.
When kids are involved in a family business, they gain a practical understanding of financial management. These lessons provide a solid foundation for future financial decision-making, a crucial life skill.
Hiring your children in your business can offer more than just a source of employment for them. It presents opportunities to optimize your tax position and save money while providing valuable work experience and financial literacy. From income shifting and deductible business expenses to avoiding payroll taxes and facilitating Roth IRA contributions, the tax benefits of employing your children can make a significant difference for your family and your business’s financial well-being. As with any tax-related matters, consult with a qualified tax professional to ensure compliance with regulations and to maximize the benefits available to you. Enjoy that extra time with your kiddos. They will be grown before we know it!
Want to learn more about how we employ our children or need help setting up a payroll software? Schedule a meeting.
Grab your checklist here to get you started with employing your child.